Debt to Income Ratio

What is a "Debt Ratio" and why is so crucial to our credit?

Your debt to income ratio (DTI) is a key indicator of your true financial picture. It is definitely the lending industry's measure of fiscal health. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income. For example, someone with a gross monthly income of $2,000 who is making minimum payments of $400 on debt (loans and credit cards) has a debt to income ratio of 20 percent ($400 / $2000 = .20).
This formula will vary slightly from lender to lender but only slightly. Some include the mortgage but raise the acceptable ratios... others do not. While variations will result in different percentage outcomes, the overall concept is the same: a debt to income ratio compares debt load to income.
Authorities seem to agree that a debt ratio (without a mortgage, utilities, etc.) of 10% or less is great. Debt ratios at 20% or higher are yellow lights as one emergency could topple the consumer big time. Yet, according to Motley Fool in the article Our Credit Crunch
"Still, far be it for the credit card industry to poo-poo your request for a line of credit. Even if your debt-to-income ratio is 50% or more, you'll probably have little trouble qualifying for a credit card. Never mind that mortgage lenders preach that your debt level -- including mortgage and all revolving unsecured debts -- should not exceed 36% of your gross monthly income. In their eyes, that leaves just 8% of your income for non-mortgage debts."

Did You Know

• BusinessWeek says that total household debt in the US was more than 100% of our disposable annual income last year. Now that is scary.
• The total consumer debt is at 1.7 trillion dollars. (You can visualize a trillion dollars as a stack of $1000 bills placed one on top of the other, flat side on top of flat side, reaching 67 miles high.)
• The personal credit card debt carried by the average American is $8,562 and the total interest paid in 2001 was $50 billion.... an average of $1000 in interest per consumer. The average consumer caries 8 cards and 20% of cards are maxed out.
• There were 1.3 credit card holders declaring bankruptcy last year. Bankruptcies have exceeded 1 million per year every year for at least 7 years now.
• If you keep your debt-to-income ratio low, you will more likely qualify for the lowest interest rates and best terms when you apply for credit.

Conclusions

America's Total Debt Report [See reference above right under ELSEWHERE ON THE WEB] states , "America has become more a debt 'junkie' - - than ever before with total debt of $32 trillion (household, business, financial and government sectors), or $115,322 per man, woman and child."

If you might be saying to yourself, "so what... that's not personal debt", think again. We had better start learning to clean up our own yard before we start thinking about cleaning up the world. As stated in the report just listed, "In some ways we may be SHORT-CHANGING OUR NEXT GENERATION, but blaming it on others will not make it better. Acquiring knowledge and taking action is an individual responsibility."

We need to start getting our debt ratio back in line as individuals first and as a nation second. We need to take individual responsibility first and national responsibility second. We need to teach ourselves responsibility first, and our children second.